1998 (6) TMI 111 - AT - Income Tax

Book Profits, Renewal, Provision, Change Of Method Of Depreciation, Withdrawals From Reserves, Diminution In Value Of Assets

Summary

Issues:
Computation of taxable income under section 115J, Treatment of excess depreciation in book profit, Interpretation of provisions for deduction in book profit, Disallowance of excise duty claim and relief under section 32AB.

Computation of Taxable Income under Section 115J:
The case involved an appeal by the assessee, a private limited company engaged in computer manufacturing, against an order for assessment year 1988-89. The Assessing Officer determined the book profit under section 115J of the Income-tax Act, leading to a dispute regarding the computation of taxable income. The primary contention was the treatment of excess depreciation in the book profit calculation, which the CIT(Appeals) did not allow as a deductible item under the relevant clauses of the Explanation to section 115J.

Treatment of Excess Depreciation in Book Profit:
The assessee argued that the excess depreciation credited in the profit and loss account for the current year should be excluded from the book profit calculation. The change in depreciation method from diminishing balance to straight line resulted in an excess provision for depreciation from earlier years, which the assessee claimed should not be considered part of the profit for the current year. The dispute centered on whether the excess depreciation was eligible for deduction under clause (i) of the Explanation to section 115J.

Interpretation of Provisions for Deduction in Book Profit:
The dispute revolved around the interpretation of provisions for deduction in book profit under section 115J. The assessee contended that the excess provision for depreciation should be deducted from the book profit as per clause (i) of the Explanation, emphasizing that depreciation is a provision created for the diminution in asset value. The Tribunal referred to legal definitions and precedents to support the argument that the excess depreciation qualified for deduction as it fell under the definition of 'provision' in the Companies Act.

Disallowance of Excise Duty Claim and Relief under Section 32AB:
Two additional grounds raised by the assessee regarding the disallowance of excise duty claim and relief under section 32AB were not pressed during the appeal. As a result, these grounds were treated as dismissed, and the focus remained on the primary issue of the treatment of excess depreciation in the book profit calculation.

Conclusion:
The Tribunal, after a detailed analysis of legal definitions and precedents, concluded that the excess provision for depreciation should be deducted from the book profit for the purpose of section 115J. The order of the CIT(Appeals) was reversed on this ground, and the appeal by the assessee was partly allowed. The Assessing Officer was directed to revise the assessment accordingly, emphasizing the correct interpretation of provisions related to the deduction of excess depreciation in book profit calculations.